MAY 28, 2007

By V Ravindran

THE Government of India has notified seven new services as taxable service with effect from 01/06/2007, of which Service provided in relation to the execution of a works contract [sub-clause (zzzza) of section 65(105)] is one.

Generally, Works contract may cover many activities, but for the purposes of levy of service tax, the Works Contract has been defined to mean a contract wherein:

(i)transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out, -

(a)erection, commissioning or installation,

(b)commercial or residential construction and related completion and finishing services, and

(c)turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.

Thus the Execution of Works Contract service [EWC service], is to cover turnkey projects including engineering, procurement and construction or commissioning (EPC) projects for the first time, as services under the category of (i) erection, commissioning or installation or (ii) commercial or residential construction and related completion and finishing services, were already covered under the net.

With the introduction of EWC service, every works contract, including turnkey projects, has to be necessarily vivisected to arrive at the goods cost and labour cost in the contract to pay VAT/Sales Tax and Service Tax. The decision of the Tribunal in Daelim Industrial Co. Ltd. v. CCE., Vadodara [2003-TIOL-110-CESTAT-DEL), will have no effect after 01.06.2007.

Perhaps, the Government may, in future, bring in more services already notified as taxable service under the coverage of EWC service. Services like Management, Maintenance and Repair Service, Interior Decorator's Service, Business Auxiliary Service etc. deserve to be brought under the above EWC service, as in these services also, supply of goods are invariably involved.

As 'Works Contract' is a composite contract involving supply, sale/transfer of goods and provision of services, levy of Service Tax is to be confined to that portion of the value which represent the services provided in relation to the execution of works contract, just like the levy of Sales Tax (VAT) on the value of goods supplied/sold/transferred in a works contract.

Thus the Central Government and the State Governments simultaneously tax an activity called Works Contract [Art.366 (29A) (b) of the Constitution of India].

Considering the complexities involved in Works Contract, the State Governments had given option to assessees to pay Sales Tax allowing specified percentage of the whole contract as abatement. Consistent with the above, the Central Government has also come up with a scheme under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 [in short WCR] introduced through Notification No.32/2007-Service Tax dated 22.05.07.

The salient features of the above WCR are as under :-

(a) It is an optional scheme to pay an amount equivalent to two per cent of the gross amount charged for the works contract instead of paying service tax at the rate specified in section 66 of the Finance Act, 1944.

(b) The VAT or sales tax paid on transfer of property in goods involved in the execution of the said works contract, is excluded from the gross amount charged for the works contract.

(c) The provider of taxable service opting to pay service tax under the said composition scheme is debarred from availing CENVAT credit of duty on inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

(d) The provider of taxable service opting to pay service tax under the said composition scheme is however, can avail of the CENVAT credit of duty on Capital Goods and Service Tax on various Input Services, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

(e) The service provider can exercise the option to pay 2% of the gross amount charged for a particular works contract and this option will not make the service provider to pay service tax for other contracts also in the same manner.

(f) The service provider can opt for paying service tax on the basis of Rule 2A of Service Tax (Determination of Value) Rules, 2006 [in short STDVR] [Notification No.29/2007-Service Tax dated 22.05.07], which provides that value of works contract service shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. However in such cases, the service provider should maintain records. WCR is not a hurdle for this.

(f) The exercise of option tax at 2% under WCR will be independent of the exercise of option under VAT/Sales Tax and options under WCR and VAT/Sales Tax need not be co-existing.

(g) The option exercised under WCR is final and cannot be withdrawn for a particular works contract. As procedure or format has been prescribed for exercising the option under WCR, a simple letter would suffice.

As of now the composition scheme for payment of service tax on works contract service under WCR appears to be distinctively advantageous to service provider and the end customer, as the service provider is rid of maintenance of records as contemplated under STDVR and the customer would also end up paying significantly less amount of service tax.

As a sequel to the introduction of EWC service, doubts may arise in the minds of the service providers under the category of (i) erection, commissioning or installation or (ii) commercial or residential construction and related completion and finishing services, who are already registered with the department under the classification (zzd) or (zzq) or (zzzh) of Section 65 (105) of the Finance Act, 1994 as to whether they should get themselves re-registered or get their registration certificate amended to reclassify their service under EWC service under (zzzza) of Section 65 (105) of the Finance Act, 1994, and exercise their option to pay Service tax at 2% under WCR. In this context, the Ministry vide letter F. No. B1/16/2007-TRU Dated 22/5/2007, as extracted below, is not very clear:-

9.9. Various trade and industry associations have raised apprehension in respect of classification of a contract either under the newly introduced works contract service or under erection, commissioning or installation and commercial or residential construction services.

9.10. Contracts which are treated as works contract for the purpose of levy of VAT / sales tax shall also be treated as works contract for the purpose of levy of service tax. This is clear from the definition under section 65(105)(zzzza) .

The following specific points of doubts have not been clarified by the Ministry:-

• When the (i) erection, commissioning or installation or (ii) commercial or residential construction and related completion and finishing services were merged with EWC service, why the entries under (zzd) or (zzq) or (zzzh) of Section 65 (105) of the Finance Act, 1994 have not been deleted?

• Why Notification No: 1/2006 ST not suitable amended to include EWC Service?

• Why the EWC service under (zzzza) of clause (105) of section 65 of the Act, does not describe the (i) erection, commissioning or installation or (ii) commercial or residential construction and related completion and finishing services with reference (zzd) or (zzq) or (zzzh) of Section 65 (105) of the Finance Act, 1994?

Unless the above points are clarified by the Ministry, it would be better for the existing service providers under (zzd) or (zzq) or (zzzh) to get their registration certificate duly amended to bring them under EWC service under (zzzza) of clause (105) of section 65 of the Act.

Once such asseessees get their registration amended for revised classification under (zzzza) of Section 65 (105) of the Finance Act, 1994, they would have only two options to pay service tax - either under WCR or under STDVR. The third option viz. the abatement of 67% Notification No: 1/2006 would not be available to such assessees since EWC service under (zzzza) of Section 65 (105) of the Finance Act, 1994 is not covered by the said notification.

If Goods Transport Agency Service was greatest (in terms of creating maximum litigation), the EWC service and the Service provided in relation to renting of immovable property for use in the course or furtherance of business or commerce [sub-clause (zzzz) of section 65(105)] would be shortly latest !